With its stock down 8.0% over the past week, it is easy to disregard Wuxi Deyao Enterprise Management Partnership (Limited Partnership) (SHSE:688205). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Wuxi Deyao Enterprise Management Partnership (Limited Partnership)'s ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Wuxi Deyao Enterprise Management Partnership (Limited Partnership)

How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Wuxi Deyao Enterprise Management Partnership (Limited Partnership) is:

4.0% = CN¥86m ÷ CN¥2.2b (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.04 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don't share these attributes.

Wuxi Deyao Enterprise Management Partnership (Limited Partnership)'s Earnings Growth And 4.0% ROE

As you can see, Wuxi Deyao Enterprise Management Partnership (Limited Partnership)'s ROE looks pretty weak. Even compared to the average industry ROE of 6.5%, the company's ROE is quite dismal. However, the moderate 13% net income growth seen by Wuxi Deyao Enterprise Management Partnership (Limited Partnership) over the past five years is definitely a positive. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Wuxi Deyao Enterprise Management Partnership (Limited Partnership)'s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 11%.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Wuxi Deyao Enterprise Management Partnership (Limited Partnership) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Wuxi Deyao Enterprise Management Partnership (Limited Partnership) Efficiently Re-investing Its Profits?

Wuxi Deyao Enterprise Management Partnership (Limited Partnership) has a three-year median payout ratio of 34%, which implies that it retains the remaining 66% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Conclusion

On the whole, we do feel that Wuxi Deyao Enterprise Management Partnership (Limited Partnership) has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.